The last two months of 2005 showed a pick up in the U.K. housing market with increased lending and transaction activity as well as rising home prices. These factors indicate that U.K.'s housing market may be in store for its first-ever soft landing. However, David Miles, Morgan Stanley's chief U.K. economist, says there may be more downward adjustments in store for 2006.

Home prices, which had been flat to falling in the first half of 2005, moved up towards the end of the year. Halifax reported a 1% rise in house prices during December, while Nationwide Building Society said prices increased by 0.5% - both reported an above average monthly gain for 2005. Miles estimated a steady rise of about 2% to 3% for the last three months of this year, with prices in the U.K. ending up slightly higher on average in real terms.

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